Direct-Sold Vs. Adviser-Sold 529 Plans

We already have adviser-purchased 529s for our two sons (in Virginia's CollegeAmerica) that we initially funded but don't continue tocontribute to on a regular basis. My husband and I would like to start contributing monthly but feel advisers look out for theirbest interests more than ours. My husband thinks we should start investing in New York's College Savings Direct (we are New York residents) to make the most of our money. But does it make sense to have 529s in two different states -- and is it allowed? Should we make new deposits to the New York plan or should stick with the Virginia plan?

You've been giving up a big tax benefit by investing in Virginia's plan rather than New York's. New York residents can each deduct up to $5,000 a year in contributions to New York's 529 plan ($10,000 per couple). But you can't take that deduction if you contribute to another state's plan. In fact, federal regulators cracked down on several brokerage firms a few years ago for pushing out-of-state 529s that left clients missing out on their state's valuable tax breaks. See this FINRA Investor Alert for more information.

In addition to the state income-tax deduction you'll get as a resident of New York, you'll also be able to invest in low-fee Vanguard funds in New York's direct-sold 529 plan. If you feel comfortable making your own 529 investing decisions, then you might want to keep all of your 529 money in this plan. If you don't want to create the portfolio yourself, you can select one of the plan's age-based portfolios, which gradually become more conservative as your child gets closer to college age.

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If you like the investing help you've been getting from your adviser, then you might want to keep some of your 529 money in Virginia's plan. You pay extra for adviser-sold 529s, but the extra fee may be worthwhile if the adviser does a good job of managing your portfolio.

Our favorite adviser-sold 529 is the one you're in now, Virginia CollegeAmerica, which lets advisers choose from 22 American Funds. But because you're a New York resident, we still recommend investing at least enough in New York's plan first to get the state income-tax deduction. You can contribute to as many different 529 plans as you want.

It's generally best to invest in your own state's 529 plan if you can get an income-tax deduction for your contributions. But after you've maxed out your own state's tax benefits, you may choose to invest in another state's plan, too, if it has lower fees, better investing choices or another benefit that your state's plan doesn't offer. And for people whose states don't offer an income-tax deduction for 529 contributions, we generally recommend considering one of Kiplinger's favorite plans -- no matter in what state they live. See The Best 529 College-Savings Plans and our Find the Best 529 Plan map for 529 recommendations based specifically on your state plan's income-tax rules, investing choices and plan fees.

For more information about saving for college -- in both 529s and other types of accounts -- as well as strategies for paying for college, see our Paying for College center.